In Unsure Times, Focus On Goals And Dollar Cost Average

|
Includes: SPY, VFINX
by: Doc on Stocks
Summary

There are a lot of things that can distract from investing: Bad press, wars, disasters.

These things can distract investors from their goals and fundamentals of their investments to cause premature selling.

Over the long term, lots of these events sometimes turn out to be little more than noise.

Since 1923, the S&P Index has returned 10% Compound Annual Growth in spite of 89 years filled with plenty of bad news.

Time is the most powerful weapon that many investors have; dollar cost average and don’t let noise distract.

Lots of things going on in the world during the present day have adversely affected stocks. Worries of geopolitical activity have caused markets to decline, and the future is uncertain. During disasters things often look bleak due to the panicked lens of fear that can obscure vision. Market sell-offs happen when investors become blinded by fear, forget that the fundamentals of their investments might not have changed, and sell.

Sell-offs are distracting. When trying to grow wealth, investors can be diverted by news that shrinks markets, even to the point of abandoning their goals to try to stop their losses by selling. There are reasons to sell based on changing fundamentals of an industry, or changing management. However, if an industry hasn't changed, and a company hasn't changed and still has the same business goals and purposes, a drop-in price is a discount that can be used to buy good businesses at lower cost. Even so, owning individual stocks places a larger percentage of a portfolio with a single business. Investors might prefer more diversity than owning individual stocks, which can be found in ETFs and index funds. Funds like the Vanguard 500 Index Fund (MUTF:VFINX) track the S&P Index, which has returned over 10% annually since introduction in 1923, not adjusted for inflation. This return is in spite of a history with plenty of downturns.

Data: Schiller

Over the long term, that 10% growth rate can add up. $5000 invested annually for 8 years and allowed to compound over an additional 32 years growing at 10% annually will give nearly $1.2 million at the end of 40 years. An investor beginning at 22 could end up with a fairly decent nest egg at 62 from only $40,000 principle. Starting to invest later in life could change things a bit. For the same period, after investing no money during the first 8, investing $5000 annually for the remainder will yield over $1 million. Investing consistently can have a large yield more because of the combined effects of compound interest and time, although investing earlier can give a greater return over the same period. Combined compound interest and time can even turn a smaller annual investment of $3000 over the same time into $1.3 million.

Table 1: Comparison of Returns

Year

1st 8 Years ($)

Skipping 1st 8 Years ($)

$3000 Annually ($)

$5500 Annually ($)

22

5000.00

0.00

3000.00

5500.00

23

10500.00

0.00

6300.00

11550.00

24

16550.00

0.00

9930.00

18205.00

25

23205.00

0.00

13923.00

25525.50

26

30525.50

0.00

18315.30

33578.05

27

38578.05

0.00

23146.83

42435.86

28

47435.86

0.00

28461.51

52179.44

29

57179.44

0.00

34307.66

62897.38

30

62897.38

5000.00

40738.43

74687.12

31

69187.12

10500.00

47812.27

87655.84

32

76105.84

16550.00

55593.50

101921.42

33

83716.42

23205.00

64152.85

117613.56

34

92088.06

30525.50

73568.14

134874.92

35

101296.87

38578.05

83924.95

153862.41

36

111426.55

47435.86

95317.45

174748.65

37

122569.21

57179.44

107849.19

197723.51

38

134826.13

67897.38

121634.11

222995.87

39

148308.74

79687.12

136797.52

250795.45

40

163139.62

92655.84

153477.27

281375.00

41

179453.58

106921.42

171825.00

315012.50

42

197398.94

122613.56

192007.50

352013.75

43

217138.83

139874.92

214208.25

392715.12

44

238852.71

158862.41

238629.07

437486.63

45

262737.98

179748.65

265491.98

486735.30

46

289011.78

202723.51

295041.18

540908.83

47

317912.96

227995.87

327545.30

600499.71

48

349704.26

255795.45

363299.83

666049.68

49

384674.68

286375.00

402629.81

738154.65

50

423142.15

320012.50

445892.79

818470.11

51

465456.37

357013.75

493482.07

906817.12

52

512002.00

397715.12

545830.27

1003998.84

53

563202.20

442486.63

603413.30

1110898.72

54

619522.42

491735.30

666754.63

1228488.59

55

681474.67

545908.83

736430.10

1357837.45

56

749622.13

605499.71

813073.11

1500121.20

57

824584.35

671049.68

897380.42

1656633.32

58

907042.78

743154.65

990118.46

1828796.65

59

997747.06

822470.11

1092130.30

2018176.31

60

1097521.76

909717.12

1204343.33

2226493.95

61

1207273.94

1005688.84

1327777.67

2455643.34

Table by Author

Those are decent returns, but some investors are able to do even more. The maximum allowed contributions of an IRA or Roth IRA are currently $5500 per year, increasing to $6500 at age 50. By making the $5500 annual contributions and investing in a fund that tracks the S&P 500, someone beginning at 22 could end up with over $2.4 million by age 61. Investors trying to build a nest egg for retirement should invest early, invest regularly, and invest for a long time.

Chart by Author

Investing an annual amount into a favorite index fund can appreciate over the years. There will be wars, disasters, and fear, as well as good news too throughout the years, but annual dollar cost averaging can mitigate the financial fluctuations. Most of the news is just noise, distracting and sometimes bringing fear and uncertainty. But if you step back from all the noise, unpleasant fluctuations cancel out in the long term. Investors should invest consistently with a long-term outlook and patience to reap the benefits of dollar cost averaging, which can mitigate fluctuations caused by unstable markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The data provided here is for informational purposes. Before buying or selling stock you should do your own research to reach your own conclusion. Investing includes risk and potentially loss of principal.